Investing in Human Capital Formation for India’s Future

India adds nearly 12 million young people to its workforce every year. That is a staggering number, and on paper, it should be an economic superpower in the making. But raw population numbers do not build an economy. What builds an economy is human capital – the skills, knowledge and health that turn a large population into a productive one. Understanding how India creates this capital, and where the system is still falling short, tells you a lot about where the country is headed over the next two decades.

What human capital formation actually means 🔗

Human capital formation is the process of converting people into productive economic assets through deliberate investment. Investment in education raises labour productivity, and this is treated as an acquired capability rather than something people are simply born with. The logic mirrors how a business invests in machinery: money spent today is expected to generate higher returns – in this case, higher future income – later on.

Education is the most visible source, but it is not the only one. Health spending, on-the-job training, migration for better opportunities, and access to timely information about jobs and markets all contribute to building a country’s stock of human capital. Skimping on any one of these areas creates a bottleneck elsewhere. A well-educated but chronically unhealthy workforce, for instance, still loses productive days to illness.

Sources of human capital formation 🔗

The paradox at the heart of India’s job market 🔗

Here is where things get uncomfortable. India does not just have an unemployment problem – it has an educated unemployment problem. Data compiled by NCERT-linked academic resources shows that unemployment rates were far higher among graduates than among those with only a primary education, a pattern that has persisted well beyond the years it was first documented. Rural female graduates have historically faced the steepest joblessness of all.

This is not because education is worthless. It is because a large share of India’s education system produces credentials without producing employable skills. The India Skills Report 2024 found that just over half of tested graduates were actually skilled enough to be hired, exposing a real gap between degrees on paper and competence in practice. Put another way: expanding college enrolment alone will not fix the jobs crisis if the quality of learning inside those colleges does not improve alongside it.

This gap matters even more now because the nature of work itself is shifting. Automation, AI-driven tools, and the gradual move of manufacturing and services toward higher-skill tasks mean that the jobs India’s youth will compete for in 2035 look very different from those available in 2015. Investment in education has to prepare people for that shift, not just for exams.

Fixing the system: accountability over enrolment 🔗

For decades, Indian education policy measured success mostly through enrolment numbers – how many children were in school. That metric hides a lot. A child can be enrolled and still not be learning to read at grade level. Three recent shifts are trying to correct this by focusing on outcomes rather than attendance registers.

Competitive and cooperative federalism 🔗

Because education is a shared responsibility between the Centre and the states under India’s federal structure, reform speed depends heavily on how state governments behave. Competitive federalism uses public rankings and performance indices to nudge states into competing with each other on outcomes rather than just competing for central funds. The Aspirational Districts Programme identified over a hundred lagging districts and used convergence, collaboration and competition to drive improvement, an approach that has since been extended to sectors like ease of doing business rankings for states. Applied to education, the same logic pushes states to improve learning outcomes, not just school infrastructure counts.

Results-based financing: the STARS project 🔗

One of the clearest examples of this shift is the Strengthening Teaching-Learning and Results for States (STARS) project, a partnership between the Government of India and the World Bank covering six states – Himachal Pradesh, Rajasthan, Maharashtra, Madhya Pradesh, Kerala and Odisha. The programme is worth roughly $500 million and aims to improve the quality and governance of school education across these states, ultimately reaching over 250 million students.

What makes STARS different from older centrally sponsored schemes is its financing model. Instead of releasing funds simply because a scheme exists, it uses a results-based financing instrument, where states unlock money only after meeting specific disbursement-linked indicators verified by an independent agency. In effect, states get paid for measurable improvement – better learning assessments, stronger teacher performance, functioning early childhood systems – rather than for merely spending a budget. It is a meaningful shift from input-based funding to outcome-based accountability, though critics have also raised concerns about how heavily the framework leans on private-sector involvement in public schooling.

The PISA question 🔗

India’s relationship with the Programme for International Student Assessment (PISA), the OECD’s global benchmark for 15-year-olds’ reading, maths and science skills, has been an uneasy one. The country’s only real participation was in 2009, and the result was not encouraging. India ranked 73rd out of 74 participating countries that year, a result the government partly attributed to cultural and language mismatches in the test itself.

India agreed to rejoin for the 2021 cycle, later postponed to 2022, only to withdraw again citing pandemic-related learning disruptions. The pattern repeated once more for the 2025 cycle, even as more than 90 other countries – including several facing comparable pandemic setbacks – chose to take part. The debate over PISA participation is really a debate about accountability: an external, internationally comparable benchmark is uncomfortable, but it is also one of the few honest mirrors a system has for judging whether its reforms are actually working, rather than simply being announced.

Beyond schoolkids: educating adolescents and working adults 🔗

Human capital formation cannot stop at age eighteen. India still has a significant population of adults who missed out on formal schooling entirely, and this is where adult education programmes come in. The ULLAS – Nav Bharat Saaksharta Karyakram (New India Literacy Programme) is the government’s current flagship effort here, aimed at adults aged 15 and above who never completed basic schooling.

The scheme, running from 2022 to 2027 and aligned with the National Education Policy 2020, covers five areas: foundational literacy and numeracy, critical life skills such as financial and digital literacy, vocational skills, basic education equivalency, and continuing education. It is designed to address five major gaps identified under NEP 2020’s vision of education for all, moving beyond simple reading-and-writing literacy toward practical, employable life skills. Implementation leans heavily on volunteers – teachers, students, retirees and NGO workers – and digital platforms available in twenty-two Indian languages, which keeps the delivery cost relatively low while extending reach into remote areas.

The logic here is straightforward economics. An adult who gains basic literacy and a vocational skill becomes more productive and more employable almost immediately, unlike a child whose economic contribution is fifteen or twenty years away. For a country trying to make the most of its working-age population before the demographic window narrows, adult learning is not a side project – it is one of the faster levers available.

Why this all adds up to India’s economic future 🔗

Put these threads together and a clear pattern emerges. Simply spending more on education is not enough. What India needs is spending paired with accountability – through competitive federalism that rewards good governance, results-based financing that ties money to measurable learning outcomes, honest benchmarking against global standards, and parallel investment in adults who were left out of the formal system the first time around. Each of these mechanisms exists precisely because enrolment-based metrics failed to capture whether children – and adults – were actually learning.

The stakes are high. India’s working-age population is set to keep growing for the next two decades, at a time when the nature of available jobs is changing faster than ever. Whether that translates into a genuine demographic dividend or a wasted opportunity depends less on how many people are of working age, and more on how skilled, healthy and employable that workforce turns out to be.

What do you think? Should India prioritise rejoining PISA to get an honest, globally comparable measure of its learning outcomes, even if the results are uncomfortable? And do you think results-based financing models like STARS should be expanded to more states, given the trade-offs around private-sector involvement they bring with them?

References

1. https://ibps.iitk.ac.in/sathee-bank-exam/student-corner/ncert-books/class-11/economics/indian-economic-development/chapter-04-human-capital-formation-in-india/
2. https://www.smilefoundationindia.org/blog/education-human-capital-india/
3. https://www.weforum.org/stories/geographies-in-depth/what-is-cooperative-and-competitive-federalism-india/
4. https://www.worldbank.org/en/news/press-release/2021/01/28/world-bank-signs-project-to-improve-quality-of-india-s-education-system
5. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1693142&reg=48&lang=2
6. https://m.thewire.in/article/education/india-opts-out-of-pisa-2025
7. https://ncert.nic.in/cncl/